Fundamental analysis of the GameStop investment case might seem pointless. But these numbers do offer a valuable lesson for the company’s newest followers.
Is there anything in the GameStop (NYSE:GME) financial results which justifies even a small part of the enthusiasm for the stock?
Management claims that comparable store sales climbed 6.5 per cent in the final quarter and the like-for-like decline can be blamed on a smaller estate - but that’s a weak argument to make when video game sales have been moving online for years. Indeed, is an online store even necessary in the future of the market as gaming moves into the cloud?
The final quarter, which includes the festive season, is unsurprisingly GameStop’s most significant. But the company hasn’t managed to report a year-on-year increase in revenue in the final quarter since 2018. Christmas just isn’t what it used to be at GameStop.
GameStop final quarter revenue ($'000m)
Jan '21 | Jan '20 | Jan '19 | Jan '18 | Jan '17 | Jan '16 | Jan '15 | Jan '14 |
2,122 | 2,194 | 3,063 | 3,503 | 3,045 | 3,525 | 3,476 | 3,684 |
Source: FactSet
Total net sales declined 9.5 per cent to $5bn, reflecting a smaller store estate and an incomplete online operation. Management also blames the poor performance on the wind-down of old consoles and does not seem to have benefited from the launch of the PS5 or Xbox X - more evidence that gaming retail is increasingly being completed by the manufacturer, while games themselves are being streamed rather than bought as individual products. GameStop's online store has a large used-games section - a dying breed - which would also explain weakening gross margins which disappeared completely this year with GameStop’s first gross annual loss.
The one ray of hope in the top line is the improvement in ecommerce which had leapt to 34 per cent of total sales by the end of the financial year, from just 12 per cent twelve months previously. Keep that up and ecommerce will likely contribute over $1bn in the 2022 financial year. That compares to $6.7bn of online sales at close US peer BestBuy (43 per cent of total revenue derived online in 2020).
BestBuy trades on an enterprise value to forecast sales ratio of 0.5 times and in the last five years, sales have grown at a compound annual rate of 3.5 per cent. GameStop trades on an enterprise value to sales ratio of 2.2 times. Perhaps that doesn’t sound too crazy considering the types of EV/sales ratios demanded by some loss-making companies, but GameStop’s revenues have declined at a compound annual rate of 7 per cent in the last five years.
On to profits where the trajectory is at least heading in the right direction. Net losses narrowed to $215m in FY2021 thanks to store closures and a 20 per cent reduction in operating expenses.
The balance sheet is also in better shape thanks largely to a better control of inventories. Net liabilities declines thanks to a $40m decline in accounts payable. Debtor days dropped from 10 to seven.
Better balance sheet health has had a positive impact on the cash flow statement and the company generated operating cash inflows in the 2020 finanical year once again. But this should be viewed in the context of the company's continued challenges: fewer capital demands reflect the company's shrinking size. With less stock to sell the company has lower inventories to manage and less bills to pay. This issue is also reflected in the falling capital expenditure. Without decent investment in its future, GameStop is going to struggle to compete. Its website user experience certainly has considerable room for improvement.
GameStop cash flow metrics ($m)
Jan '16 | Jan '17 | Jan '18 | Jan '19 | Jan '20 | Jan '21A | Jan '22E | |
Cap Ex | -173 | -143 | -113 | -94 | -79 | -57 | -67 |
FCF | 484 | 394 | 322 | 231 | -493 | -10 | -114 |
Source: FactSet
So is there anything in these results to suggest that the short sellers had got it wrong and the Wall Street Bets crowd might have picked a hidden diamond when they ploughed into GameStop earlier this year?
No. These are a set of results typical for an ageing retailer which has failed to shift its business model to suit the times. The share price has fallen 12 per cent so far in response to these numbers, but at $180 (up 4,000 per cent year-on-year) there is presumably a lot further to fall. The best course of action (even for those who bought in near the $400 mark) is surely to ditch these shares before they keep falling? But then markets - and GameStop in particular - seem to be trading purely on sentiment, rather than fundamentals. Perhaps the best course of action is to check the message boards first.
